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Vitaliy Katsenelson
Vitaliy Katsenelson
Articles (126)  | Author's Website |

Why I Am Not Buying BestBuy

April 10, 2012 | About:

Best Buy’s (NYSE:BBY) CEO Brian Dunn did a courageous and proper thing for shareholders by resigning. He was not the right person to lead Best Buy into battle against online-only competitors that use Best Buy’s spacious and beautiful stores as the showroom for their products. To make things even worse, smart cell phones make comparison shopping so much easier nowadays, and structurally, Best Buy cannot have lower prices than its online competitors. Its stores also lack the breadth of selection of Amazon (NASDAQ:AMZN) and they are at a permanent, competitive cost disadvantage. The new strategy Dunn announced a few weeks ago of closing big stores and opening a lot of smaller stores for mobile sales makes little sense. It is basically morphing Best Buy into a Radio Shack (RSH). It would be great if this strategy had worked for Radio Shack, but it didn’t. Radio Shack’s margins are collapsing, and that is why its stock is scratching as-far-as-my-chart-goes-back lows.

I don’t know what the solution is for Best Buy (NYSE:BBY). It must involve a much tighter collaboration of physical stores and its internet presence – the stores need to be turned from a liability into an asset. Or maybe a logistical miracle that would allow Best Buy to deliver a much, much greater range of products (like, hundreds of thousands) to its customers on the day they order them. One thing is for certain: the new strategy will require thinking that cannot be delivered by somebody who spent 28 years in the Best Buy box. It requires a Netflix or Amazon-like strategy, where management was willing to bring forward (and flawlessly execute) a disruptive strategy that undermines its current cash cowing business. Amazon did this by bringing electronic readers to the masses, which undermined its core book business. Netflix (NASDAQ:NFLX) did it with streaming. I am sure I’ll get plenty of dissenting emails about Netflix: “We don’t know if its model will be successful down the road,” etc. I’ll admit, I don’t know what Netflix’s streaming business is worth. But one thing is for certain, if it did not bring out streaming it would have been dead in three to five years. Now it has a fighting chance to survive and maybe even create value for shareholders.

I am a value investor, and so when I see a stock dangling at six times earnings I’d be lying if I told you that I did not have an inkling to seriously consider it for our portfolios. But Best Buy is not a retailer that missed a fad (stacked the shelves with wrong-color shirts, etc.) – those sorts of situations often present great buying opportunities, as the problems are easily fixed. Best Buy is a retailer that so far has missed a structural change that may make its business obsolete. It is only cheap if the “E” projected for next year will be there. So far the market is betting that it won’t, and I have no insight that encourages me to disagree with the market.

About the author:

Vitaliy Katsenelson

Vitaliy N. Katsenelson, CFA, is Chief Investment Officer at Investment Management Associates in Denver, Colo. He is the author of The Little Book of Sideways Markets (Wiley, December 2010). To receive Vitaliy’s future articles by email or read his articles click here.
Investment Management Associates Inc. is a value investing firm based in Denver, Colorado. Its main focus is on growing and preserving wealth for private investors and institutions while adhering to a disciplined value investment process, as detailed in Vitaliy’s book Active Value Investing (Wiley, 2007).

Visit Vitaliy Katsenelson's Website

Rating: 2.7/5 (20 votes)


Onthefringe - 5 years ago    Report SPAM
My computer crashed last week, and I actually went shopping for a laptop at Best Buy. Turns out the company has bigger problems than just Amazon alone.

The new laptop, with the a 2 year damage protection and servicing contract from Best Buy cost me around $1,000 (a little over I believe). Costco offered the exact same computer with more storage room and a FREE 2-Year damage protection and service plan for somewhere around $600!!!

The only difference is that you have to wait 15 days by mail to get your laptop. So I ended up buying it at Best Buy because I really needed it and because I know Geek Squads service is pretty good, and Best Buy stores are usually close by no matter where you are.

I don't know enough about the business to say anything with certainty. But in terms of competitive pricing for big ticket items, Best Buy has a long road ahead of it.
BEL-AIR - 5 years ago    Report SPAM
I go to best buy all the time, I must have bought thousands of dollars from them, and looking at buying a new laptop both for personal and for my business in the next 6 to 8 months, will buy on sale at best buy. Also Need a new external hard drive, all in one machine as well as a new smart phone, I will buy all these things this year at best buy, will spend at least $2,000 their this year...

This is my typical buy each year at this store.

They are close to were I live, and have nice big new stores, at least in Canada.

I always buy on sales though since I am a cheap guy and a value investor, on sale you can't beat the price even compared to online stores, and I can easily take it back and they are good with exchanges.

Plus I love there online store.

I also love their New Years sales the best though.

I only bought one thing in my life at Amazon, bought it this year, tWo audio books on Warren Buffett... Might not buy anything from Amazon again in years, not that the service was bad, just have no need.

Most people need support on tech, phones, pc etc, Best Buy has this... A typical family wanting a home entertainment system with the support that goes with this, will look at buying at Best Buy.

I not sure were I would buy my stuff if Best Buy closed.

Perhaps Future Shop here...

But wait, best buy owes them to here in Canada.

Oh well....

I don't see them going broke anytime soon since Best Buy has a reasonable debt, unlike Circuit City before they went broke.

I don't own the stock but if it fell to below $12 I might....

I love sales.

Maybe Mr Market will give me another bargain this News Year:-)

Forexnutca - 5 years ago    Report SPAM
Best Buy needs to focus more on their electronic recycling.
Onthefringe - 5 years ago    Report SPAM

"I not sure were I would buy my stuff if Best Buy closed."

Costco!!!! Lol. You get the same stuff and service for a lot cheaper. In this case Costco is a much better buy for the consumer, so long as you know ahead of time what you want to buy. Best Buy is better for last minute purchases just because of their locations. But I don't think the average consumer is going to go out and buy a premium TV or a laptop the day they decide they want one (or have the money to).

And like Amazon, Costco only sells certain items like these laptops online, hence the 15 day delay and discount. It may just be that consumers at large don't yet realize that they have this national network of an option available to them. But if they do, Costco has an advantage over Best Buy in huge discounts to Best Buy's prices and an advantage over Amazon in that they provide servicing and alternatives to warranty. An annual membership only costs $55. I'm not sure if any other retailers offer similar prices and services. But it's worth looking into.

Point is, you may want to look at threats beyond Amazon just to be certain. And if Costco can do it, I'm not sure why other retailers can't.

Matt Blecker
Matt Blecker - 5 years ago    Report SPAM
Many investors are missing the point on Best Buy. My article gives a detailed view of my thesis (as well as my previous article which is linked within the article linked below):


Comparisons to Circuit City and Blockbuster are baseless as those companies had trouble generating a profit many years before bankruptcy. Circuit City posted losses for many years before their bankruptcy, with the exception of 2006, but even 2006 was an operating margin well below Best Buy's worst year. Blockbuster was generating losses years before Netflix was in existence and had huge leverage as noted by their significant interest expense relative to income which was much greater proportionally to Best Buy today.

I don't even think Radio Shack is a good comparison. Radio Shack is hugely dependent upon margins from mobile sales within the US, where as Best Buy has greater revenue from other items such as a wider selection of TVs, entertainment systems, and appliances, greater service revenue, as well as more international opportunities than Radio Shack, such as mobile demand in Europe, and appliance demand in China.

FCF is also plentiful and should drive earnings growth due to heavy share repurchases.

Additionally, Amazon is having a trouble generating any profit margin at all, partially due to higher shipping costs, which are now 5% of revenues. If Amazon ever wants to make a significant profit, they may be forced to raise prices, which will be good for Best Buy.

Lastly, electronics and appliance demand has been very weak in the US, a lot of which is due to extremely weak housing starts. Best Buy should benefit from increased demand when housing starts pick up.

Tonyg34 - 5 years ago    Report SPAM
While I agree with Mr. Blecker that Best Buy is not comparable to Circuit City or Blockbuster (because it is in profitable runoff), I think the article he wrote fails to do a thorough value chain analysis of the business. Best Buy has no sustainable moat as proven by the vast superiority of MicroCenter in every conceivable capacity. Better product selection, better customer service, better online service, better prices.

The onlly sustainable advantage in retail is the ability / willingness to sell a commodity for a lower margin than your competitors, and in this regard the clear winners are Amazon and Costco.

So the question for stock investors is will the cash flow from BBY's deteriorating business pay you back for your investment between now and when they give up the ghost.
Tkervin - 5 years ago    Report SPAM
Interestingly I just purchased a scan/fax/printer at Best Buy after purchasing an iMac at an Apple Store.

The Apple Store was small and packed wall to wall with customers. You literally could touch multiple shoppers from any store location.

I was greeted at the Apple Store, shuttled to a very good sales associate, had my purchase and receipt generated on his iphone very quickly. In fact I spent less time at the Apple Store than I did at an almost empty Best Buy after being helped by a couple of fairly clueless sales people and having the wrong combo printer brought out from stock.

I would not be surprised if the roughly 1200 sq. ft. Apple Store generated more sales each hour than the big box Best Buy did in a day.
Matt Blecker
Matt Blecker - 5 years ago    Report SPAM

I am aware that Amazon and Costco are more efficient operators and better at delivering customer value, but that is already reflected in their stock prices. I am not buying Best Buy for their value chain, as I feel the company has a lot they can improve upon in terms of delivering value to the customer; I am buying Best Buy because it is extremely cheap. I feel the company will be able to maintain its operating income after delivering decent results throughout this period of economic difficulty the last few years.

Because of their free cash flow they should be able to grow earnings due to share repurchases, even if net income remains stagnant, margins decline slightly, etc...

I feel they have a few things that will work in their favor, such as a housing market that is likely to recover within 2-3 years, cost cutting, mobile/tablet growth, FCF driving EPS growth due to share repurchases, international opportunities, and most importantly, Amazons lack of profitability and free cash flow as noted in my article in the analysis of Amazon's increasing shipping costs and extended payables period.

Moneymaker5o1 - 5 years ago    Report SPAM

Best Buy's great for showrooming.. as in touch, experience, play with the product before purchasing it elsewhere
DocMoney - 5 years ago    Report SPAM
Maybe best buy should charge an entrance fee:)
Onthefringe - 5 years ago    Report SPAM
Mr. Blecker,

It's clear you know a lot about Best Buy (much more than I do). Consider BBY's competitive position and pending operational restructuring (I believe they said they are going to have smaller stores). Do you think its future cash flow generation will resemble the amount of annual cash flow it has generated over the past few years?

I ask trying to educate myself, not criticize.

Please leave your comment:

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